Taking risk is core to any organization’s raison d’être – regardless of its mission.  However, in light of the events of recent years, visionary leaders are taking a hard look at how their organizations manage these risks. 

For motivation, leaders only have to look at NBC’s management – or mismanagement – of Jay Leno’s move to primetime.  While this change met the Network’s financial objectives, the affiliates’ profits were negatively impacted.  How did leaders seemingly miss the possible impact on this critical constituency?  No one seems to have looked broadly at the associated risks.  Now, NBC management is in damage control mode.  

Leaders, learning from past mistakes, recognize the value of robust risk management practices.  For them, this moment in time is a “strategic inflection point”; an expression coined by Intel co-founder Andy Grove to describe when business fundamentals change, requiring leaders to either invest or see their organization wither. 

History’s Lessons

The recent economic disaster was caused, in part, by the virtual obliteration of an effective risk management discipline.  During most of the 00’s, the collective wisdom maintained that markets only went up, obviating the need to devote resources to risk management. 

Recent events proved how misguided this assessment was; as markets cratered, the economy came close to a total collapse.  Ben Bernanke, a scholar of the causes of the Great Depression, made just enough right moves to prevent the economy from falling off the precipice. 

Want to roll the dice again?  Not me. 

Thoughtful leaders want to avoid the path taken by US Auto Executives in the 1970s.   Asian executives are engaging consultants to delineate what mistakes led to the “Great Recession”.  A Delaware judge (where many US entities are incorporated) ruled last February that a Board could be held liable for failure to establish a compliance system to prevent alleged widespread violation of laws.  In response, directors are beginning to ask more questions and demand plans from their organizations.    

Risk Management: Everyone’s Concern

Whose responsibility is risk management?  Each and every employee contributes, positively or negatively, to an entity’s risk profile.  For instance, negative actions can instantly damage a reputation (you don’t have to be a Tiger to implode a reputation in one evening).  Leaving passwords unprotected and sharing passwords makes your IT infrastructure vulnerable to unwanted penetration.  

 Other risks are more segregated.  IT, Treasury, Investments, Receivables (Lending) et al all have risks unique to their function.  Specific expertise and knowledge are required to identify and mitigate these risks. 

One proposed solution is to create a Chief Risk Officer position – a “C” level champion of Risk.  However, if Risk Management is one person’s responsibility or one area’s focus, others are likely to feel absolved of responsibility.  One person or area cannot do it alone.  Everyone must feel engaged.  Risk management is as strong as its weakest link. 

Organizational Implications

Visionary leaders understand that a robust risk management organization requires many building blocks, each with a price tag attached.  There is no free lunch.

Financial Implications: Resources must be dedicated to achieving this objective.  Good people are needed, reporting systems must provide meaningful intelligence, and actions taken that sacrifice short -term profit for longer-term security (e.g. liquidity planning, trading limits, credit lines); these components all have associated costs.     

Culture:  To be successful, the organization’s culture must promote teamwork since it is impossible for one person, no matter how bright or hard-working, to know all the questions or have all the answers.  A multi-disciplinary approach to problem-solving and identifying potential pitfalls before disaster strikes is required.

The questioning of underlying assumptions must be encouraged.  Group think cannot be the order of the day. Visionary leaders encourage staff to question their ideas while, at the same time, not allowing his/her organization to go into analysis paralysis.    

Talent:  To assess and quickly identify risks requires talent that can think quickly and adroitly, both quantitatively and qualitatively, across multiple disciplines, cultures, and frameworks.   Project managers need to harness diverse skill sets’ knowledge, synthesize it, and quickly make it intelligible for non-subject matter experts.  

Measurements and Rewards:  Managers must reward those individuals who identify and mitigate risks before they become a problem.  As Upton Sinclair observed “it’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.” 

An organization’s balanced scorecard or dashboard needs to include risk metrics, customized for the business dynamics. 

Conclusion

While far from simple, visionary leaders understand that they need to establish and maintain a robust risk management function.  The alternative is to see their organization join the ranks of Lehman Brothers, Drexel Burnham, Continental Bank, Pan American Airlines and other, once blue chip, American corporations.

Charlotte Nad consults with leaders and senior managers on business and organizational effectiveness.